You’ve found the home you want to buy. You made an offer, and the sellers accepted it. The home inspection is complete. There’s one last step before you can head into closing on your mortgage and complete the purchase of your new home: the home appraisal. This is a critical step in the mortgage process for the buyer, seller and the lender.

In a home appraisal, a licensed appraiser provides an opinion of the value of the home based on a variety of factors, including the condition of the house, the neighborhood around it and recent sale prices of comparable properties. If the appraisal price is at or above the price in the sales contract, then you will proceed to close on the loan and finalize the transaction. If the appraisal price is less than the contract price, there will need to be some additional steps taken to get to the closing table.

Why do you need to do a home appraisal?
You might be saying to yourself, “We’ve agreed on a price. The home passed inspection. Why do we need an appraisal?” The lender sees things a bit differently. They are extending a large sum of money to enable you to buy the home, with the purchased property serving as collateral. If you default on the loan, the lender wants to be reasonably certain that they can sell the property for an amount sufficient to cover their loss. As such, lenders are not likely to offer a loan amount that is higher than the appraised value.

How much does an appraisal cost and who pays for it?
The cost of a home appraisal can vary by market, property and loan type. Generally, an inspection will cost $500 to $750. In large metropolitan areas or places with higher than average cost of living, appraisal fees can exceed $1,000. Typically, the mortgage lender will select the appraiser, and the buyer pays the appraisal fee.

What if your appraisal comes back below the purchase price?
If the home appraisal value is below the price in your purchase contract, some additional steps are needed to get to closing. Here are a few actions you can take:

  • Identify any errors or omissions in the appraisal report that may have lowered the value of the home. Bring these items to the attention of your lender so they can consider them.
  • Request a second appraisal. Having a second appraisal done by a different appraiser may be an option, especially if you found errors in the original report or believe the appraiser overlooked different comparable property sales. The lender may be agreeable to a second appraisal, but you will have to pay for it.
  • Negotiate a lower purchase price. Armed with the low appraisal price, you may be able to work with your realtor to negotiate a lower sales price with the sellers and satisfy the lender’s concerns.

Get informed
Understanding the home appraisal process will be helpful as you approach the closing date of your loan, especially if the appraisal comes in below the purchase price. An experienced lender will be able to provide sound guidance. If you have questions about appraisals, reach out to a member of our home lending team.


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